The bad news and the great news
Slowest growth in decade forecast

JAYANTA ROY CHOWDHURY

New Delhi, Feb. 7: India’s economic slowdown is a lot worse than what everyone has projected until now.

The Central Statistical Organisation (CSO) today forecast that the economy would grow by a tepid 5 per cent in the ongoing 2012-13 financial year — the slowest in a decade — deepening concerns about the economic drift that set in about 18 months ago.

The stuttering economy will put greater pressure on the UPA government to adopt tougher and more unpopular decisions to step up the pace of reforms and slash subsidies. The economy had grown 6.2 per cent in 2011-12.

Nine days ago, the RBI had trimmed its baseline projection of GDP growth in the current year to 5.5 per cent from 5.8 per cent made earlier. Most forecasters have been projecting a growth of 5.5 per cent.

The CSO’s note indicates that there are big worries in almost all segments of the economy:

Agriculture growth is projected to tumble to 1.8 per cent from 3.6 per cent in the previous year.

Manufacturing will trundle along at 1.9 per cent (2.7 per cent last year).

The services sector won’t see the sort of robust growth it has shown in earlier years.

The CSO dices up the services sector into three segments: financing, insurance, real estate and business services are projected to grow at 8.6 per cent against 11.7 per cent last year. Trade, hotels, transport and communication will see growth slow to 5.2 per cent from 7 per cent a year ago. Only community, social and personal services will grow faster at 6.8 per cent versus 6 per cent a year ago.

Finance minister P. Chidambaram will be able to use the CSO forecast in his attempt to quell demands from Congress colleagues and UPA coalition’s allies for a populist budget later this month. They contend that it would be politically suicidal to anger voters ahead of next year’s general elections.

C. Rangarajan, the chairman of the Prime Minister’s economic advisory council, said: “The numbers are disappointing. But I believe that when the full estimates are available, growth will be higher than what has now been projected.”

Rangarajan’s optimism isn’t borne out by the trend in growth estimates since the current slowdown began in the second quarter of 2011-12. Exactly a year ago, the CSO had forecast GDP growth for 2011-12 at 6.9 per cent in its advance estimate. This was cut back to 6.4 per cent in the quick estimates and further trimmed to 6.2 per cent in the first revised estimate.

Said Vidya Mahambare of Crisil Research: “The manufacturing sector has taken a deep hitÖ. This is the slowest pace of growth for the manufacturing sector in the past 14 years.”

But she added that much of the slowdown in 2012-13 could be attributed to the sharp decline in the growth of the services sector — the biggest contributor to GDP — which grew only at 6.6 per cent compared with 8.2 per cent in the last financial year.

Prime Minister Manmohan Singh and Chidambaram will be looking to cut petroleum subsidies and slash fat defence budgets, open up the economy further to foreign investment, sort out land acquisition issues in order to boost private investment and end the logjam over handing out mining concessions.

In the first half (April to September), the economy grew at 5.4 per cent. Today’s data indicate that the economy may have grown by just 4.2 per cent in the quarter ended December 31 and may grow by 5 per cent in the current January to March quarter.

Ficci president Naina Lal Kidwai said the CSO data threw into stark relief what the government needed to do: speed up decisions on investment proposals, usher in a goods and service tax regime, pass the insurance and pension bills in the next session of Parliament and introduce greater competition in the coal mining sector.

Unable to drum up support from the Opposition, the government could not press for a vote in the winter session on the insurance bill that seeks to raise the limit on foreign investment in this sector to 49 per cent from 26 per cent at present. The debate will now take place in the next session and a crucial vote hinges on whether the UPA can persuade more members to support the move.

“We need to revise the duty structure so that the domestic makers of capital goods, electric equipment, telecom industries and the steel industry, which have been swamped by imports, can revive their fortunes,” said a finance ministry official.

The government could raise duties in the forthcoming budget on some of these imported products while reducing levies on raw materials such as iron ore, coal and components for telecom and electrical equipment.

Industry captains want the government to establish an independent coal regulator that would break the monopoly of state-owned Coal India Ltd and a few private players that have managed to corner coal blocks for captive consumption.

Officials say the Prime Minister has been pushing them to clean up the Direct Tax Code that could rejig tax rates and enlarge the tax base. The DTC is expected to simplify tax laws, spark fewer legal disputes over taxes and, ultimately, ensure better compliance.